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EUR/USD update (23rd Aug 2012, 06:00)

In US trade, the euro and the pound both surged to their highest levels since early May as traders responded enthusiastically to the latest set of FOMC meeting minutes.

The minutes, released with two hours left in the trading day, were more dovish than the market had expected and led to an immediate and broad-based USD sell-off. The minutes revealed that committee members considered several policy tools to provide additional monetary stimulus, including ’a new large-scale asset purchase programme‘ and an extension of the rate guidance beyond 2014.

The minutes also noted that members felt additional monetary accommodation (in some form) could be warranted ’fairly soon‘. How soon will be answered shortly, with many commentators still believing it could be as soon as the Fed’s next meeting in mid-September. Slight improvements in US economic data in recent weeks had some analysts winding back expectations of imminent Central Bank action, but the latest minutes seemed to have put further stimulus right back on the agenda as the most likely course of action from the Fed. Having ended yesterday’s Australian session around the 1.2460 level, the euro spiked sharply higher after the release of the minutes to close US trade at 1.2529.

Similarly the pound rallied nearly 100 basis points after the release of the Fed minutes to close US trade at 1.5880. Both currencies have carried on that momentum in early Asian trade with the euro and the pound in the 1.2540s and 1.5890s respectively. Tonight’s German GDP final revision and German and French manufacturing and service PMIs shape as the next directional influences for both currencies.